Japanese and U.S. export volumes rebounded in January on heightened demand for capital goods and durables, possibly creating some traction for job growth. While capital flows for 2010 through February have rebounded compared with 2009 (almost twice as high), they remain sharply compressed compared with the first two months of 2008 and 2007, largely reflecting anemic bank-lending. In contrast to U.S. dollar cross-exchange rates, which have been volatile since the onset of the crisis, changes in real effective exchange rates (REERs) have been more stable and have followed divergent trends tied more to domestic factors. The USD has appreciated 4.5% in REER terms since pre-crisis August 2008. Commodity exporter REERs have generally appreciated, while China’s currency has depreciated a modest 1.7%.

High-income country exports and production are stepping up, as countries find receptive markets for capital goods and durables. Strong demand in China and Asia spurred a surge in Japanese export volume growth to 40% in January (y/y) following a decline of 22% in the third quarter of 2009. In similar fashion, U.S. exports registered 15.6% gains (y/y) helping to boost manufacturing output, with glimmers of employment growth on the horizon. For developing countries as a group, exports increased 32% in December (y/y). Despite robust growth, trade remains 27% and production 18% below their respective levels in 2007.

Total capital flows for the first two months of 2010 are up 48% (y/y), although they remain 47% lower than in 2007 and 23% lower than in 2008. Bank lending remains weak—underscoring that bank recapitalization is a lengthy process. After a barrage of issuance in January, bonds faltered in February, reflecting a seasonal hiatus and Greece’s debt crisis. Although bond issuance slowed in February, the pipeline remains full, with many sovereigns announcing plans to issue in coming months (e.g., Russia, Poland, Romania, Ukraine, and Albania). Indeed, issuance picked up during the first three weeks of March, with $13billion placed.

Real effective exchange rate (REER) developments reflect country specific factors. Despite heightened volatility in the nominal value of the U.S. dollar against most currencies, the USD REER has been relatively stable, having gained 4.5% since just before the crisis in August 2008. In the Euro Area, Germany’s REER has appreciated little despite the sometimes wild fluctuations in euro/dollar cross rates over the last two years. The currencies of commodity exporters (e.g. Brazilian real and Indonesian rupiah) have rebounded- unwinding much of their 2008 losses that were precipitated by declining commodity prices and the financial crisis. After appreciating sharply in the immediate wake of the crisis, China’s REER has since depreciated. As of February 2010, it was a modest 1.7 percent lower than its pre-crisis level, but still 18 percent above its level in July 2005 when China initiated the crawling peg regime that was abandoned during the financial turmoil of 2008.